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the impact of regulatory capital requirement on profitablity

S

Smith

Member
Chapter 36, point 12.1.2 in the Syllabus, discussion how regulatory capital requirements impact on a provider's profitability, from my understanding is covered by the part 4 of the Chapter, page 14-15, am I right? if yes, after reading, the part mainly describes the components of profitability and explain what they are, seldom explicitly mention how the impact of regulatory capital requirements on the profitabiliy. How to understand this part of content? and how to answer the syllabus point if asked in the exam? please advise.
 
Hi - yes, you have found the correct part of the course which includes the Core Reading relating to that syllabus objective.

It might be worth re-reading Chapter 23 (Pricing & financing strategies) Section 1 - particularly Section 1.3 - alongside the Chapter 36 content, as a reminder of how/why the cost of holding regulatory capital is loaded into pricing calculations.

Section 4 of Chapter 36, particularly Section 4.2, explains in more detail how the 'cost of holding capital' relates to the opportunity cost of whatever capital is locked in to support capital requirements, rather than being used for other purposes. In other words, it reflects the loss of investment return resulting from having less freedom of investment choice for that locked-in capital. The Core Reading then goes on to explain how basing a premium loading on this opportunity cost measure results in the required level of profit.

Putting these aspects together explains how having to put capital aside to meet regulatory capital requirements impacts profit.

Hope that helps.
 
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